Valuation of Goodwill

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Goodwill is an intangible element connected with the going concern which include personality, reputation, the company name, convenient and favourable location of the business, quality of merchandise, efficient management, supply and demand for a choice product, affordable prices, efficient labour relations with employees, true and fair view and finally courteous methods of treating customers. Goodwill is often shown on the accounting books and records and therefore on the balance sheet only when it has been purchased. In the concluded analysis, the real test of existence of goodwill is the ability to earn a rate of return which is higher than it is usually realized in the industry. Some companies write off the cost of goodwill over a period of a few years as a special item on the statement of income. A charge off in the year of acquisition is not considered good practice. If the excess profits which serves as the initial evidence of the existence of goodwill have been stated, the goodwill is written down then the assets or owners’ equity will be understated and will not give a true and accurate position of the company. When the goodwill asset no longer has value the write off corrects the assets and owners’ equity values. AIMS AND OBJECTIVES OF VALUATING GOODWILL IN A BUSINESS.

The International Accounting Standards Board (IASB) regulations states that goodwill should be recognized as a fixed asset and classified as an intangible asset when it is purchased, acquired or merged together in a business combination and to have its accounting value assessed annually for any impairment in value. An impairment loss is written off against profits. Some companies acquire goodwill for the company such as employee skills, customer’s loyalty and the location of business premises and there is no goodwill in its balance sheet therefore the value for such goodwill is not accounted for in the company report.

The Companies Act 1985 requires that goodwill which has a limited useful economic life is to be reduced to their residual value that is the “Scrap Value” over such life that is exceeding the time that it will be used by the company. The core objectives of valuating and managing of goodwill properly is to prescribe the accounting treatment for goodwill as an asset and identify how to recognise and know the worth in the annual report as represented in the company’s balance sheet showing the true and accurate position of the company. It also shows how to measure the carrying amount of the goodwill and it requires certain disclosures as stated by the International Accounting Standard (IAS). The value of goodwill amortised or capitalised during the year should be disclosed in accordance with the Statement of Standard Accounting Practice (SSAP). EXAMPLES

When goodwill is shown in the balance sheet whether acquired, purchased or merged together in a business, it should be shown as an intangible fixed asset and separate from other intangible assets e.g. patents, concessions, licences, trademarks and other similar rights and assets. Some companies follow the rules that non-purchased goodwill should not be stated or that purchased goodwill should not necessarily appear in the balance sheet as a fixed asset but the preferred treatment for such purchased goodwill should be written off immediately it is acquired against the reserves while some other companies regard amortization through the company’s profit and loss account as another alternative. The contrasting treatments have caused a lot of criticism. CURRENT REGULATIONS

The Accounting Standard Board (ASB) has set up a priority for the resolution of this problem, while the Statement of Standard Accounting Practice (SSAP) and the International Accounting Standards Board (IASB) is currently working on a joint treatment for goodwill in the balance sheet for accurate assessment of the goodwill asset....
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